Oil Trading Alert: Other Bearish Arguments and Their Implications for Crude Oil

On Friday, the price of light crude declined from $102 as concerns over domestic
supplies encouraged oil investors to sell the commodity for profits. Will the
psychological barrier of $100 withstand the selling pressure in the following
days?

On Friday, the Thomson Reuters/University of Michigan's final April consumer
sentiment index came in at 84.1, beating market expectations for a 83.0 reading.
This positive news in combination with the ongoing conflict in Ukraine took
the price above $102. Despite the increase, rising concerns over domestic supplies
encouraged oil investors to take profits and pushed light crude below $101
per barrel. As a reminder, crude-oil supplies have increased in 13 of the last
14 weeks and currently stand at 397.7 million barrels and this is the highest
recorded level since the 1931. At this point, it's also worth noting that refinery
capacity utilization rose 2.2 percentage points last week to 91%, but crude-oil
stocks still rose by 3.5 million barrels, which is a bearish signal.

Having discussed the above, let's move on to the technical changes in crude
oil (charts courtesy of http://stockcharts.com).

(...) crude oil gave up the gains and declined below the medium-term
resistance line (marked with black). With this move, the commodity invalidated
the breakout above this support line, which is a bearish signal. Taking
this fact into account, it seems that we may see further deterioration
and the downside target for the sellers will be the lower line of a triangle,
which corresponds to the 50-week moving average at the moment (around $100.25).

As you see on the weekly chart, the situation has deteriorated as crude oil
extended losses and dropped to its downside target on Friday. With this downward
move, light crude also approached the 50-week moving average. Taking these
facts into account, we should consider two scenarios. On one hand, if the support
area encourages buyers to act, we may see a corrective upswing in the following
days. In this case, the upside target for the buyers will be the medium-term
resistance line (currently around $103.50). However, if oil bears do not give
up and push the price below the support zone, we will likely see further deterioration
and a drop even to around $95, where the medium-term support line (based on
the June 2012 and January 2014 lows) is. At this point, it's worth noting that
the CCI generated a sell signal, while the Stochastic Oscillator is close to
doing it, which suggests that another attempt to move lower should not surprise
us.

To see the current situation in crude oil more clearly, let's zoom in on our
picture and move on to the daily chart.

(...) light cude increased and hit an intraday high of $102.35, approaching
the 38.2% Fibonacci retracement. If this resistance level encourages sellers
to act, we may see another test of the strength of the 50-day moving average
(which still serves as major support). (...) if the 50-day moving average
is broken, the next downside target for the sellers will be the 200-day
moving average (currently at $100.81). Please keep in mind that sell signals
generated by the indicators remain in place, supporting the bearish case.

Looking at the above chart, we see that after the market open the sellers
took control and succesfully realized the above-mentioned bearish scenario.
Thanks to this downswing, the price not only dropped below two important moving
averages, but also under the lower border of the rising trend channel, which
is a negative sign. If the breakdown is not invalidated, we may see further
deterioration and the downside target for the sellers (which corresponds to
the height of the formation) will be around $97 (this area is supported by
the March low of $97.37). Please note that even if oil bulls manage to push
light crude above the resistance line, the combination of the 200- and 50-day
moving averages may pause or stop further improvement. Connecting the dots,
it seems that further deterioration is just around the corner (this scenario
is also supported by sell signals generated by the indicators in the previous
week).

Summing up, the short-term situation has deteriorated as crude oil
declined below the lower border of the rising trend channel (and also under
the 50- and 200-day moving averages). If we see another daily close below this
line, the breakdown will be confimed, which may trigger further deterioration
- especially, if the price of light crude declines below the lower line of
a triangle marked on the weekly chart (currently around $100.25). If this strong
support is broken, we'll consider opening short positions.

Nadia is a private investor and trader, dealing in currencies, commodities
(mainly crude oil), and stocks. Using her background in technical analysis,
she spends countless hours identifying market trends, major support and resistance
zones, breakouts and failures. In her writing, she presents complex ideas with
clarity that enables you to easily understand market changes, and profit on
them. Nadia is the person behind Sunshine
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